World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Tuesday, February 10, 2009

Well, unfortunately for America, the people on this forum correctly called the reaction to Geithner’s bank bailout plan. They voted that the rocket would blow up on the pad and that’s exactly what happened:

And a spectacular explosion it was.

After watching Obama’s NOTHING speech last night I had a feeling there was too much hype, too much HOPE, and that did not match the reality. Then Geithner gets up and has NOTHING new to offer. The market was expecting a SPECIFIC plan, but all that was offered was what dire shape we are in and how we must work through the process.

HERE’S THE TRUTH… the people who created this problem are NOT capable of fixing it. THEY ARE THE PROBLEM. They cannot see or admit that the solution is to GET RID OF THEM. They have created an unworkable math situation and they are unwilling to take their losses, they want to push their losses off on us, and that just isn’t going to work as they are far, far, too large. Thus DEFAULT of some kind is coming, it’s just a matter of who takes it. That’s the truth and I know it’s hard to acknowledge, no one wants to face that fact willingly.

When Geithner speaks of the financial system needing liquidity, he is DEAD WRONG. The system has too much liquidity and has all along, that’s the problem. You can’t solve too much liquidity with a flood of liquidity – that does not work. The problem is one of SOLVENCY, not liquidity. The difference being that the debts outweigh the assets. That is not a cash shortage problem, it’s a solvency problem. The banks cannot mark to market or that reality is exposed – that’s why Geithner’s plan didn’t come together and won’t come together in any form that represents reality.

Feb. 10 (Bloomberg) -- Treasury Secretary Timothy Geithner laid out what he described as a “comprehensive” attack on the financial crisis, warning that administration’s strategy will “cost money, involve risk and take time.”

“The financial system is working against recovery, and that’s the dangerous dynamic we need to change,” Geithner said in excerpts of his prepared remarks for delivery today in Washington. “Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged.”

The Treasury chief pledged a further round of capital injections for U.S. banks and an initiative, in partnership with private investors, to address the toxic assets weighing down banks. New taxpayer funds come with tighter restrictions on banks, including limits on dividend payments, acquisitions and executive pay, administration officials said.

Today’s overhaul of the Treasury’s $700 billion financial- rescue fund is aimed at addressing the failures of the first phase of the program, which has yet to spur a wave of new lending to companies and consumers. Geithner’s warning about the cost of the effort followed signals yesterday by President Barack Obama that the administration is open to seeking more money.

The administration’s plan is designed to support about $1.5 trillion in new lending and handling of distressed securities, people familiar with the matter said.

Two-Front Campaign“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” Geithner said in the excerpted remarks. “We have to both jumpstart job creation and private investment, and we must get credit flowing again to businesses and families.”

Stocks fell after Obama yesterday warned the economy is at risk of a “full-blown crisis.” The Standard & Poor’s 500 Stock Index fell 1.4 percent to 857.36 at 10:39 a.m. in New York.

Obama yesterday urged Congress to approve a fiscal stimulus that will cut taxes, boost spending on roads, schools and other infrastructure, and provide aide to state budgets. The Senate may vote on the stimulus today.

Geithner at 11 a.m. will lay out his plans for deploying the second half of the $700 billion bank rescue plan, which has been known as the Troubled Asset Relief Program. The administration plans to rename it the Financial Stability Plan.

“This comprehensive strategy will cost money, involve risk, and take time,” Geithner said. The initial bailout effort, which he helped administer in his previous job as head of the Federal Reserve Bank of New York, was “essential” while “inadequate” to support the financial system and the secondary-lending market.

Stress TestsRegulators plan to subject banks to new tests to determine whether they have enough capital, people familiar with the matter said. The Treasury, Fed and other supervisors in the President’s Working Group on financial markets will develop guidelines for the examinations, which are aimed at ensuring that the country’s largest banks can withstand a worsening economy.

Banks that don’t have sufficient capital will be given additional taxpayer funds in the form of convertible preferred securities, people familiar with the matter said.

The new capital will have tougher conditions than the Treasury’s first round of as much as $250 billion of bank-stake purchases. Participating banks will have their dividends and political lobbying efforts restricted, along with limits on stock repurchases, acquisitions, executive compensation and so-called golden parachutes. Any luxury spending provisions must also be disclosed, administration officials close to the plan said.

Use of FundsFirms must also show how government aid will expand lending and how they intend to use the funds, the officials said.

“The American people have lost faith in the leaders of our financial institutions” and are skeptical of the rescue spending so far, Geithner said in the prepared remarks.

“In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them,” Geithner said. “Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses -- large and small.”

Geithner’s package includes $50 billion for measures to stem mortgage foreclosures, administration officials said. Banks receiving federal funds will be required to participate in efforts to mitigate foreclosures. The Treasury and Fed will work to reduce monthly payments and establish loan-modification guidelines, officials said.

Toxic AssetsThe administration is also aiming to differentiate the next phase of the financial plan by bringing in private investors. It plans a public-private investment fund to take on older toxic assets. Officials have not yet decided on the specific mechanics of the facility, which will be introduced in lieu of the so- called bad bank of earlier proposals.

The scope of the investment fund is expected to be a range of as much as $500 billion, backed by roughly $50 billion in public funding, people familiar with the matter said.

To kick-start new lending, the Financial Stability Plan will expand a Fed program for consumer and business loans to as much as $1 trillion from the current $200 billion. The Term Asset- Backed Securities Lending Facility will be backed by as much as $100 billion of Treasury funds in case of losses.

Fed officials have yet to start up the TALF, which was intended to be under way this month and could now be renamed. It will lend funds to investors in securities backed by student, credit-card and auto loans. Eligible debt will be expanded today to include commercial mortgage-backed securities, and more types of lending may be added later, people familiar with the matter said.

FDIC GuaranteesThe Federal Deposit Insurance Corp. is also set to expand its debt-guarantee program, created late last year to ensure banks’ access to credit markets, the people said. The agency is looking at 10-year guarantees for some kinds of assets.

The new approach comes four months after the start of the $700 billion TARP, which both Democrats and Republicans have criticized as ineffective. The task Geithner faces is reviving a U.S. banking system throttled by $752 billion in credit losses and an economy that lost almost 600,000 jobs last month.

Obama yesterday warned that the ultimate cost of the financial bailout is not yet known.

“We don’t know yet whether we’re going to need additional money or how much additional money we’ll need until we’ve seen how successful we are at restoring a sense of confidence in the marketplace,” Obama said in his news conference last night in Washington.

Feb. 10 (Bloomberg) -- U.S. stocks fell, sending the Standard & Poor’s 500 Index to its biggest drop since Barack Obama’s inauguration, while Treasuries rallied and the dollar slumped against the yen on skepticism that the government’s bank rescue will work.

Bank of America Corp. and Citigroup Inc. lost more than 9 percent after Treasury Secretary Timothy Geithner said he’s still “exploring a range of different structures” to bail out lenders. Principal Financial Group Inc. plunged 27 percent on concern the life insurer needs more capital. Alcoa Inc. slumped 4.9 percent after S&P cut the aluminum producer’s credit rating to the lowest investment grade. Gold rallied 2.5 percent to $914.90 an ounce.

The S&P 500 Index dropped 3.4 percent to 840.72 at 12:05 p.m. in New York and lost as much as 4 percent, the most since Jan. 20. The Dow Jones Industrial Average decreased 287.61 points, or 3.5 percent, to 7,983.26. Ten-year Treasury notes rose, driving their yield down by 0.12 percentage point to 2.87 percent. Japan’s currency gained 1.1 percent to 90.43 per dollar.

“The initial aspects of it are convoluted, and it’s still a work in progress,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “Investors voted with their feet.”

Geithner pledged government financing for programs aimed at spurring new lending and addressing banks’ toxic assets, an effort that may grow to as much as $2 trillion.

The benchmark index for U.S. stock options jumped to the highest since Jan. 20 as investors paid more to use options as insurance against stock-market declines. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 9 percent to 47.57. The index, calculated from prices paid for S&P 500 contracts, averaged 32.65 last year. Options give the right to buy or sell a security at a set price and date.

I’m sorry to say it, but Obama and Geithner do not represent CHANGE in regards to the economy so far – the new boss would seem to be the same as the old boss. Obama is running head on into the reality of math. He is learning that there are not white ponys that expel rainbow colored skittles.

Oh, I’d like to be positive about the economic situation, unfortunately the only thing I’m positive about is that the math doesn’t work and that the people who got us into the situation (Geithner and central bankers) are NOT capable of getting us out. The new boss is surrounded with the same old crowd.